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LIMITATION ON ‘PHANTOM LOSSES’
The loss-limiting formula ‘proceeds less post-valuation date expenditure’ will always result in a no gain or loss situation. In order to understand this formula it is necessary to begin with the core base cost formula:
Base cost = valuation date value (VDV) + post-valuation date expenditure
A no gain or loss situation arises when:
Base cost = Proceeds.
This can be restated as:
VDV + post-valuation date expenditure = Proceeds
And then rearranged as :
VDV = Proceeds – post-valuation date expenditure
Essentially the ‘proceeds less post-valuation date expenditure’ formula works backwards to arrive at a VDV that will yield neither a gain nor a loss after the post-1 October 2001 expenditure is added to it.
